# PS6 Answers - Problem Set#6 Answer Key 1 a Assume that the...

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Problem Set #6 Answer Key 1 a. Assume that the dividend has yet to be paid. Since the firm has a 100% payout policy, the entire net income, \$32,000 will be paid as a dividend. Then, the current value of the firm is the discounted value from 1 year hence, plus the current income: \$1,545,600 Value \$32,000 1.12 \$1,412,000 =+ = b. The current price of \$141.20 per share will fall by the value of the dividend to \$138: \$32,000 net income Price \$141.20 10,000 shares outstanding \$141.20 \$3.20 \$138.00 =− = c. i. According to MM, it cannot be true that the low dividend is depressing the price. Since dividend policy is irrelevant, the level of the dividend should not matter. Any funds not distributed as dividends add to the value of the firm hence the stock price. These directors merely want to change the timing of the dividends (more now, less in the future). As the calculations below indicate, the value of the firm is unchanged by their proposal. Therefore, share price will be unchanged. To show this, consider what would happen if the dividend was increased to \$4.25. Since only the existing shareholders will get the dividend, the required dollar amount is \$4.25 x 10,000 shares = \$42,500. Then, the dollars to be raised are: \$42,500 required funds - \$32,000

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PS6 Answers - Problem Set#6 Answer Key 1 a Assume that the...

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